Socially, things should keep getting better in the second half of 2021, but what about financially? Will the second half of 2021 be better, about the same, or worse for your investments than the first half? Naturally, no one knows for sure, but some recent developments might help give us an answer. After rising steadily from January to May, the hot stock market suddenly cooled off a bit and volatility returned. That was mainly blamed on fears about inflation, and those fears have continued to some degree. In fact, June saw quite a bit of volatility. The Dow Jones Industrial Average sank below 34,000 for the first time since April,* and ended June slightly down for the month.
At the same time, long-term interest rates also rose steadily in the first quarter. The yield on the 10-Year Treasury rate jumped from 0.93% to 1.74% between New Years and late-March.** Rates have leveled off and even dropped some since, with the 10-Year ending June at 1.48%. However, that big jump of more than 50% did create some challenges for income investors due to the inverse relationship between interest rates and bond values. The good news, though, is that the soaring stock market and other factors also created conditions and opportunities for portfolio managers to minimize those challenges. In fact, even our most conservative clients saw their portfolio values increase over the first half of the year despite the interest rate headwind. Those with a higher risk tolerance saw even greater increases thanks to strong-performing value stocks, BDCs, ETFs, and other higher-risk income strategies.
So, while we can be reasonably sure the second half of the year will be better from a social standpoint, what about in terms of the markets from an economic standpoint? Well, despite these recent bouts of nervousness, I don’t believe inflation fears will have a major impact on the markets in the second half of the year. I also believe long-term rates should remain stable, and that the Fed will remain committed to keeping short-term rates near zero through at least the end of 2022. All these factors should—I believe—help minimize the risk of another major market pullback. At the same time, I think it’s likely that the market growth we do see from now through December will be more gradual and less dramatic than it was in the second half of last year or the first half of this year. In short, I believe the economic picture will continue to be good for investors in the second half of the year, but not dramatically “better” like the social picture.
When managing your portfolio at SIS, we look for one of four possible “enhancement” trades while reviewing securities and possible transactions. Income generation is our primary goal for our clients, and we consider the following four portfolio enhancements before transacting: current yield, yield to worst (minimum projected annualized total return), interest rate risk, and default risk. The intents of these transactions are categorized as follows:
- Pay Me Now – Enhancing current yield
- Pay Me Later – Enhancing yield to worst
- Cover My Assets I. – Managing interest rate risk
- Cover My Assets II. – Managing default risk
We evaluate the transactions by determining whether they meet one, two, three, or all four enhancements. A baseball analogy for this: SINGLES, DOUBLES, TRIPLES, and HOME RUNS.
There were no swaps for the month of June.
*“Dow Falls More than 500 Points,” CNBC, June 17, 2021
Note: The above trades were recent block trades and do not reflect all trades done on an individual specific basis. Sound Income Strategies, LLC is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Past performance is not an indication of future results. Be sure to first consult with a qualified financial advisor or tax professional about your specific financial situation before implementing any strategy discussed herein.
You are advised to give independent consideration to, and conduct independent investigation with regards to the information above in accordance with your individual investment objectives. Use of the Information is at the reader’s risk, is strictly intended for informational purposes in conjunction with the recipient’s due diligence, and should not be construed as a solicitation by Sound Income Strategies, LLC. Past performance will never indicate or guarantee future behavior. Sound Income Strategies, LLC does not represent or warrant that the contents of the document are suitable for you from